introduction chapters
chapter 15
Financial Reporting
and Concepts
goals discussion
goals achievement
fill
in the blanks
multiple
choice
problems
check list and key terms
Following is a "checklist" of selected key concepts that are likely to be included on an exam. Review and check-off each noted item to be certain that important concepts have not been overlooked in your study.
What is a prior period adjustment, and when is this accounting device used?
Identify the nature of discontinued operations and extraordinary items.
Know the special accounting treatment associated with discontinued operations.
Know the special accounting rules for extraordinary items.
Know how to account for and report changes in accounting principle.
Distinguish between the terms restatement and retrospective adjustment, knowing which is applicable to changes in principles.
Be able to prepare a comprehensive income statement that includes elements such as discontinued operations and extraordinary items.
Describe the net-of-tax reporting rules, and state why such rules exist.
Be able to calculate basic earnings per share.
Specifically understand the concepts (and computations) pertaining to weighted-average number of shares and earnings available to common stockholders.
Be familiar with the structure for reporting EPS data, including the notion of diluted earnings per share.
What is book value per share, how should it be interpreted, and how is it calculated (including cases involving more than one class of stock)?
Be able to calculate the dividend payout ratio and the dividend yield.
Define the objectives of accounting.
Identify the characteristics of financial information.
Provide specific definitions for relevance, reliability, comparability, consistency, and understandability.
Define generally accepted accounting principles.
What bodies are instrumental in the development of GAAP?
Differentiate between governmental and nongovernmental bodies that help define GAAP.
Be able to define the following assumptions: entity, going-concern, periodicity, monetary unit, and stable currency.
What are the key issues associated with international accounting?
What body influences the formulation of international accountancy?
Know how to account for typical foreign currency transactions, with special attention to appropriate year-end adjustments.
KEY TERMS AND DEFINITIONS (with links to discussion in text)
| accounting changes | Changes from one acceptable method of accounting to another acceptable method; like straight-line depreciation to a declining balance approach |
| Accounting Principles Board | The private sector group charged with developing accounting standards from 1959 to 1973; primary authoritative pronouncements were known as "opinions" |
| AICPA | American Institute of CPAs; an organization whose members are CPAs interested in advancing the accounting profession |
| basic EPS | The simplest earnings per share number; earnings available to common shares divided by weighted average shares, without factoring in potential dilution |
| book value per share | Common stockholders' equity divided by common shares outstanding, to indicate stockholders' equity per share |
| business component | Part of a business with clearly distinguishable operations; a business segment, unit, subsidiary, or group of assets |
| comparability | A quality of accounting such that different companies may use different accounting methods, but there is still sufficient basis for valid comparison |
| complex capital structure | companies with options, warrants, or convertible bonds and stocks that may result in the issuance of additional shares |
| comprehensive income | Net income plus items of other comprehensive income (e.g., market value adjustments of available for sale securities) |
| consistency | A quality of accounting holding that deviations in measured outcomes from period to period should be the result of deviations in underlying performance (not accounting quirks) |
| diluted EPS | An earnings per share number; adjusted to reflect the potential effect of dilutive securities |
| dilutive securities | Options, warrants, convertible bonds, convertible stocks, and other items that have the potential to increase the number of shares outstanding |
| discontinued operations | The special income statement reporting of the impact of disposing or abandoning of a component of a business |
| dividend payout ratio | Dividend per share divided by earnings per share |
| dividend rate | Dividend per share divided by stock price; also called dividend yield |
| earnings | A concept that relates to income from continuing operations plus/minus discontinued operations and extraordinary items |
| Earnings per share | EPS; generally understood as the amount of income for each share of stock, but is actually better refined as basic and diluted EPS (see those definitions) |
| EBIT | An analysts calculation to reflect "earnings before interest and taxes" |
| EBITDA | An analysts calculation to reflect "earnings before interest, taxes, depreciation, and amortization" |
| entity assumption | Accounting information should be presented for circumscribed distinct economic units |
| extraordinary item | The gain or loss resulting from a transaction or event that is both unusual in nature and infrequent in occurrence; reported below income from continuing operations |
| GAAP | Generally accepted accounting principles -- encompass the rules, practices, and procedures that define the proper execution of accounting |
| going concern assumption | In the absence of evidence to the contrary, accountants assume that a business will continue to operate well into the future |
| IASB | International Accounting Standards Board; organization undertaking to develop cohesive accounting rules with global acceptance |
| intraperiod tax allocation | Separately reported item like discontinued operations, extraordinary items, etc., are to reported net of their specifically related tax effects |
| net income | Income from continuing operations plus/minus other special items like discontinued operations, etc., but before items of "other comprehensive income" |
| PCAOB | Public Accounting Oversight Board -- a private-sector, non-profit corporation, charged with overseeing the auditors of public companies |
| price earnings ratio | The per share market value of a stock divided by its earnings per share |
| principles-based | The idea that accounting standards should articulate broad-based principles rather than specific and detailed rules |
| prior period adjustment | To correct errors from prior years; prior financial statements are retroactively changed to make them correct |
| relevance | A quality of accounting such that it is timely and bears on the decision-making process by possessing feedback and/or predictive value |
| reliability | A quality of accounting information such that it is faithful in representation; free from bias, neutral, and verifiable |
| remeasurement | One of two approaches for converting the financial statements of a foreign affiliate to the reporting currency |
| return on assets ratio | A ratio comparing income (net income plus interest) to the average total assets |
| return on equity ratio | A ratio comparing income (net income minus preferred dividends) to the average total equity |
| rules-based | The idea that accounting standards must be very specific to provide adequate guidance and drive consistency in reporting |
| Sarbanes-Oxley | "SOX" -- Legislation that imposes stringent controls over reporting and auditing; created the Public Accounting Oversight Board |
| Securities and Exchange Commission | "SEC" -- regulatory body with which public companies must file and report |
| SFAC | Statements of Financial Accounting Concepts -- a series of conceptual documents to guide the FASB in establishing new rules |
| SFAS | Statements of Financial Accounting Standards -- primary authoritative pronouncements issued by the FASB |
| stable currency assumption | An accounting assumption that presumes the currency is not impacted over time by inflation |
| translation | One of two approaches for converting the financial statements of a foreign affiliate to the reporting currency |